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Underreporting of Earnings and the Minimum Wage Spike

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  • Tonin, Mirco

    () (Free University of Bozen/Bolzano)

Abstract

This paper documents a positive correlation within European labour markets between the proportion of full-time employees with earnings on the minimum wage and the extent of underreporting of earnings in the economy. Using a simple model of a competitive labour market, I show how this correlation can emerge as a result of the common dependence of both quantities on the strength of enforcement of fiscal regulation. This suggests that a high spike in the wage distribution at the minimum wage level is, in some contexts, an issue of fiscal enforcement, more than a labour market issue.

Suggested Citation

  • Tonin, Mirco, 2011. "Underreporting of Earnings and the Minimum Wage Spike," IZA Discussion Papers 5942, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5942
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    References listed on IDEAS

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    1. Mariano Bosch & Marco Manacorda, 2010. "Minimum Wages and Earnings Inequality in Urban Mexico," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 128-149, October.
    2. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, January.
    3. Tonin, Mirco, 2010. "Too low to be true: the use of minimum thresholds to fight tax evasion," Discussion Paper Series In Economics And Econometrics 1018, Economics Division, School of Social Sciences, University of Southampton.
    4. Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2009. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 504-554, June.
    5. Ahn, Tom & Arcidiacono, Peter & Wessels, Walter, 2011. "The Distributional Impacts of Minimum Wage Increases When Both Labor Supply and Labor Demand Are Endogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 12-23.
    6. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    7. Tonin, Mirco, 2011. "Minimum wage and tax evasion: Theory and evidence," Journal of Public Economics, Elsevier, vol. 95(11), pages 1635-1651.
    8. Lemos, Sara, 2009. "Minimum wage effects in a developing country," Labour Economics, Elsevier, vol. 16(2), pages 224-237, April.
    9. Colin C. Williams & Sara Nadin, 2012. "Tackling Undeclared Work in the European Union," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(2), pages 20-25, July.
    10. Tito Boeri & Pietro Garibaldi & Marta Ribeiro, 2011. "The Lighthouse Effect And Beyond," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 54-78, May.
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    Cited by:

    1. Anna Lukiyanova, 2011. "Effects of Minimum Wages on the Russian Wage Distribution," HSE Working papers WP BRP 09/EC/2011, National Research University Higher School of Economics.

    More about this item

    Keywords

    lighthouse effect; minimum wage; spike; underreporting;

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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